Saturday, March 19, 2011

Bi-partisan legislation introduced by Senator Kay Bailey Hutchison (R-TX) would raise the 500-shareholder threshold for SEC reporting from the current 500 holders to 2000 for banks and bank holding companies. The bill, S 556, is co-sponsored by Senator Mark Pryor (D-AK). The legislation would also raise the SEC decertification of registration threshold from 300 shareholders to 1200 for banks and bank holding companies, while leaving the shareholder thresholds at 500 and 300 for non-banking companies. It would also leave intact for all entities the monetary threshold for registration at $10 million. Within one year of enactment, the SEC would have to adopt regulations implementing these provisions.

Under Section 12(g) of the Exchange Act, companies with more than $10 million in assets whose securities are held by more than 500 owners must file annual and other periodic reports with the SEC, which reports are then available to the public through the SEC's EDGAR database. While the $10 million threshold has been incrementally increased over the years from the $1 million level initially set in 1964, the 500 shareholder of record requirement has never been updated. While the shareholder threshold of 500 at one time may have been an accurate reflection of a public market, reasoned the ABA, it no longer is given the vast expansion of the number of investors.

In a 2008 letter to then SEC Corporation Finance Director John White, the American Bankers Association explained that, for the banking industry, the shareholder number is the only meaningful Section 12(g) measure since 99 percent of all banks have assets in excess of $10 million. The ABA noted that retaining the outdated shareholder threshold makes it difficult for banks to raise capital in their local communities for fear that they will trigger the 500 shareholder threshold.

In 2007, then SEC Chairman Chris Cox addressed this issue in a response to Senator Olympia Snowe’s questions at a Small Business Committee Hearing. At that time, Chairman Cox informed Senator Snowe that SEC staff had been directed to determine whether the SEC has sufficient authority to amend the Commission’s rules relating to the shareholder threshold that triggers registration and that the SEC’s Office of Economic Analysis was directed to undertake a review of the Section 12(g) registration standards to determine whether they continue to be the most appropriate means of accomplishing the objectives of Section 12(g).

The Hutchison-Pryor legislation would also direct the SEC’s Chief Economist and Corporation Finance Director to jointly conduct a study of the shareholder registration threshold. Specifically, the study must include a cost-benefit analysis of the shareholder thresholds, including the benefits to investors of the increased disclosure that results from registration and the costs to issuers associated with registration and reporting requirements, as well as the administrative costs to the SEC associated with different thresholds.

The cost-benefit analysis must also evaluate whether it is advisable to increase the asset threshold, index the asset threshold to a measure of inflation, increase the shareholder threshold, change the shareholder threshold to be based on the number of beneficial owners, and create new thresholds based on other criteria.